5 Credit Union Myths Debunked
Even though there are credit unions across the UK, some people still don’t know exactly what they are or what they offer. Find out the truth behind some common myths about credit unions.
How much do you know about credit unions? Chances are, you may not know much about them at all or even be aware of what they offer.
This lack of awareness and knowledge about credit unions means there are some common misconceptions about who can use them and how they work.
And these misconceptions could be stopping the very people they are designed to help from joining.
Phil Cole, CEO of Advance Credit Union, has identified some of the main misconceptions that people have about credit unions. Find out what these common myths are and what the reality is.
Myth: Credit unions are charities
There is some confusion about what a credit union actually is. Some people think they are charities, while others believe they are a government department.
However, credit unions are completely separate from any governing body and, even though they are ‘not for profit’ organisations, they are not charities.
Credit unions are financial co-operatives, which simply means they are owned and controlled by its members and work to benefit them.
They are regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), and any money you deposit in a credit union (up to £85,000) is protected by the Financial Services Compensation Scheme (FSCS). This means credit unions are as safe to use as banks and other regulated lenders.
Myth: Credit unions are for low-income households
Many people may think that credit unions are a “poor man’s bank” for low-income groups.
However, credit unions are for everyone. You simply need to meet a union’s ‘common bond’ criteria, which means that you need to live or work in a certain area or be employed in a certain industry to join, for example.
This is underlined by Robert Kelly, CEO of the Association of British Credit Unions (ABCUL).
“Credit unions serve their local communities, be they geographical or employment based, and anyone in these communities can join them,” he explains. The most common misconception is that credit unions exist only to serve certain demographics, normally the financially excluded.”
Credit unions could be particularly beneficial to people who may be struggling financially and might not be able to access finance from mainstream providers, but people of all income levels can become a member and benefit from their services.
Credit unions offer savings accounts and loans, and a few are even starting to offer mortgages.
As there are credit unions across the UK, most people are likely to be eligible for at least one. You can find a credit union here.
Myth: You already have to be a member before applying for a loan
If someone isn’t a member of a credit union and they want a loan, they may not realise that a credit union could still be an option for them.
You can find credit unions that will allow you to join and apply for a loan on the same day, so you don’t need to have been a member for a minimum length of time or saved a certain amount before applying.
In fact, Cole says that “most of our new members join with a loan before they’ve built up savings.”
This could be crucial information for people who aren’t eligible for loan products from mainstream lenders.
A poll by the Institute of Money Advisers in September 2021 found that 80% of the debt advisers it surveyed knew of a credit union providing a loan to someone who had been refused by other lenders.
Knowing that they may be able to get a loan from a credit union could help people to avoid loan sharks and high-interest forms of credit.
Myth: You always need to have savings with the credit union to get a loan
Not necessarily. With some credit union loans, you may only be able to borrow up to the amount in your savings account, or, in some cases, two or three times this amount.
However, you can also find credit unions offering a range of loans of varying amounts that are not based on how much savings you have. Indeed, it’s possible to get a loan from a credit union without having any savings at all.
Myth: Employers can see an employee’s finances
Some credit unions offer a payroll deduction scheme. This is when a credit union works with an employer to automatically deduct some of your salary into savings or to pay off a loan.
Cole says that some members assume that this allows employers to view their employees’ finances, but this is not true. Information about an employee’s financial situation is completely confidential.
The employer will be told how much to deduct from your salary, but information about your savings, loans and other finances won’t be shared with them.
Image source: Getty Images
Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more